The last 15 months have seen an increase in Chapter 12 bankruptcy filings among farmers and ranchers in Nebraska.

As production costs continue to exceed commodity prices, more farmers will likely be filing Chapter 12 bankruptcy.

Joe Hawbaker, an agricultural law attorney in Omaha, Neb., said there has been a significant increase in filings, with a 30 percent increase between 2016 and 2017, and 2018 being on pace to exceed 2017.

Chapter 12 bankruptcy is “typically the last tool a farmer or rancher reaches for,” Hawbaker said.

Chapter 12 bankruptcy laws were created in 1986 during the farm crisis, with the purpose of giving family farmers a fighting chance to reorganize their debts and keep their land.

A bankruptcy case begins with a filing in U.S. bankruptcy court. The bankruptcy estate is property owned by the debtor as of the date of filing. Claims (or debts) against the debtor are generally classified as one of three basic types: secured claims, unsecured claims, and priority claims. Secured claims are secured by a lien on the debtor’s property, whether real or personal. Unsecured claims are not secured by a lien on the property, because there is no collateral to secure the claim (for example, some medical debts, credit card debts and open account purchases). A priority claim has special status under bankruptcy laws, such as certain claims for taxes, child support, alimony and the cost of the bankruptcy. Priority claims usually have to be paid in full.

Exemptions allow the debtor to protect certain property from the claims of creditors and vary from state to state. Chapter 12 bankruptcy is a reorganization bankruptcy, as compared to a liquidation bankruptcy. In a liquidation, the debtor tries to erase debt by giving up non-exempt property.

PAYING OFF DEBT

In a reorganization, the idea is that the debtor keeps possession of the property that they want or need to keep, while paying their debt under the terms and conditions of the bankruptcy. In other words, you pay for what you keep and surrender what you don’t want or cannot afford to keep.

The goal of bankruptcy is the discharge, the court order that makes legally binding the conditions of the bankruptcy, namely, the forgiveness or restructuring of debt.

What Chapter 12 bankruptcy does is put up a wall around a farmer’s or rancher’s operation. The wall, called the automatic stay, prevents creditors from collecting debt through repossessing collateral, garnishment or foreclosure. It gives the debtor a little breathing room in which to comply with the Chapter 12 procedures and to come up with a plan of reorganization.

Chapter 12 also allows debtors to restructure debt and may also allow some debt to be written off, partially or entirely. It helps in dealing with tax debts like capital gains or recaptured depreciation, that come from selling farm assets.

After filing, the immediate pressure a debtor feels is relieved, but the hard work has just begun. Within three months of filing, the debtor, working with his or her lawyer, must put together a Chapter 12 plan, a plan of reorganization, showing how the farm or ranch will keep going.

The core of the plan is how creditors’ claims will be handled. For secured claims, claims that have a lien on the debtor’s property, the debtor may propose to restructure them based on the collateral that secures the claim. A secured claim must be paid at least as much as the value of the collateral that secures it. Valuing the collateral relative to the amount of the claim is an important part of the bankruptcy. A claim secured by land can be reamortized over 20 (sometimes to as many as 30) years and paid in installments that coincide with when funds are available (i.e., when crops or livestock are sold). A claim secured by machinery or equipment can be restructured over three to seven years, depending on its quality. A claim secured by livestock can be restructured for payment over five to 10 years, depending on the livestock. One of the goals of Chapter 12 for the debtor may be to get as long a payout as possible, in order to lessen the burden on the cash flow. Another benefit to Chapter 12 bankruptcy is to structure payments so they are due when the debtor is most likely to have funds, for example, in late winter for row crop farmers.

Unsecured claims are handled differently than secured claims. Unsecured claims do not have any collateral securing them, so they are handled under what is called the liquidation analysis. If the debtor had filed under Chapter 7 (liquidation) instead of Chapter 12 (reorganization) bankruptcy, what would the creditors have received? Payment in full? Fifty cents on the dollar? Nothing? Value of the farm debtor’s property is determined, then certain things are subtracted from the value: the amount of the secured claims, the debtor’s exemptions, and the hypothetical cost of sale of the assets. Any amount that remains in the value of the estate property is the amount available to proportionally pay unsecured creditors. The amount they must be paid ranges from nothing to full payment, depending on the value of the debtor’s property and the amount of the unsecured claims.

The Chapter 12 plan is usually set for three years, sometimes five. Unsecured claims typically have to be paid within that period of time, often without interest. If creditors or the trustee of the bankruptcy object to the plan of reorganization, the debtor must put his disposable income towards the unsecured claims. However, there may be very little disposable income.

PRIORITY CLAIMS

Priority claims usually must be paid in full. Child support and alimony are usually paid in accordance with court orders. Taxes are often priority claims. But if taxes were filed and due more than three years before the bankruptcy was filed, they may be considered unsecured claims. Another advantage of Chapter 12 is that if a farmer sells farm assets, the tax claims from those sales can be treated as unsecured claims and they may not have to be paid in full or at all.

Farmers and sometimes ranchers usually borrow money for operating expenses each year. Borrowing that money when a person has filed Chapter 12 can be a problem. If a farmer files bankruptcy before the crop is planted, the new crop can be pledged as collateral to the lender.

With the new crop, the lender may have a first lien on that crop, on crop insurance, and on Farm Service Agency payments. Chapter 12 financing is often limited in value to the guaranteed crop insurance coverage. Livestock financing may be more difficult to obtain, and a Chapter 12 debtor may have to operate under his own steam, gaining the release of cash proceeds of livestock to meet operating expenses.

Before Hawbaker’s clients file for Chapter 12, he does a thorough analysis with them, working out their options: Can they refinance with a new lender? Will their current lender work with them to restructure debt if certain conditions are met? Are there possibilities for a partial sale of assets that would alleviate debt? Is there assistance available through family, such as sale of assets to family? If time allows, Hawbaker likes to help his clients examine what kind of terms they will expect to receive with Chapter 12. “It’s important to understand ahead of time what a Chapter 12 can do for an operation,” he said, “to estimate what the cash flow will look like under Chapter 12 terms and to look at feasibility.” This means running numbers. The current interest rate in bankruptcy may be 6.25 percent (the Wall Street Journal Average National Prime plus 2 points).

Bankruptcies cost money. The debtor pays the trustee (in Nebraska, the fee can be as high as $6,000 a year) and his own lawyer’s fees (ranging from $7,500 to $15,000). In some circumstances the debtor has to pay his secured lender’s attorney fees, which are typically added to his debt. This is usually true when a lender is oversecured. If the debtor’s collateral is worth more than the debt, the lender is often entitled to collect attorney fees from the debtor, along with interest. Bankruptcy is “not cheap,” Hawbaker said.

There are more than financial costs to consider. “The potential stresses of having to deal with being in a bankruptcy and meeting all the requirements and deadlines, especially in the first few months,” is stressful, Hawbaker said. There’s a significant amount of stress, and people handle it differently. “Some people approach bankruptcy as a management tool. They take a more distanced, objective view of how to use the bankruptcy to solve problems. For others, everything is taken personally. Decision-making in times of great stress can become very difficult. Bankruptcy in many respects is meant to help with that difficulty.”

Debtors also have to “face down the idea of being in bankruptcy,” Hawbaker said. Bankruptcies are public record, and there may be stigma attached to those who have filed for bankruptcy. That stigma, Hawbaker said, is often based in ignorance, not of the debtor but of those stigmatizing the debtor. “There have been lots of bankruptcies filed in this nation, and some by people who went on to become great success stories.”

FINANCING

A risk that must be considered when filing for Chapter 12 bankruptcy is financing. It’s not likely that a debtor’s lender will loan them new money when they are in bankruptcy. Hawbaker advises those who are considering filing for Chapter 12, if time permits, to explore funding for the bankruptcy with another lender, even to make applications ahead of time.

Farmers who lease ground are “quite vulnerable” in a Chapter 12 filing. In order to keep the lease, the farmer must be current on rental payments and in general be able to make them as they come due. There is no guarantee a landowner will continue to rent to the debtor. Debtors with long-term contracts may be able to keep those contracts under bankruptcy rules.

Hawbaker does a lot of preparatory work with clients before and after they file. “It’s very important to establish realistic expectations of what bankruptcy is, what it will do for you, how much work it is, and the risks. This is critically important.”

In his experience, Hawbaker finds that a wide majority of his Chapter 12 clients come through bankruptcy to get their discharge, the goal (and end point) of bankruptcy, and most continue to farm. He attributes that to their determination and the preparatory work they do together before filing. He cautions people to be clear about what Chapter 12 is and what it can do for them. “The more clear-eyed and hard-eyed you can be about what’s involved, the better.”

“Succinctly put,” he said, Chapter 12 “bankruptcy gives you a chance to make next year’s payment (under restructured terms). And if you can make that payment, you get to make the next year.”

The Nebraska Farm Hotline (800) 464-0258, located in Bancroft, is a great clearinghouse of services for farms and ranches, especially those dealing with financial distress transactions. In Nebraska there are also free one-on-one clinics offered for farm and ranch families through the Nebraska Farm Mediation Service. These clinics are held in four locations every month. Information about them is available through the hotline.

For producers from South Dakota, Wyoming and Montana, help is available through Departments of Agriculture. Mediation programs can be found by calling each state’s department. For South Dakota, call (605) 773-4432; for Wyoming, call (307) 777-8788; for Montana, call (406) 444-5424.

There is evidence that in Nebraska, most farm leases are oral year-to-year leases. This is important because Nebraska law governs how to terminate such leases and September 1 is a critical day should a landowner wish to terminate an oral lease.

First, the law:

The Nebraska Supreme Court has ruled that a farm lease begins on March 1 for oral year-to-year leases. To terminate an oral year-to-year lease, however, the Court has ruled that six months notice must be given prior to March 1. In other words, to terminate an oral year-to-year lease, a notice to quit must be received by the tenant prior to September 1 of the preceding year.

Second, some examples:

Example 1:

The landowner as an oral year-to-year tenant. Landowner decides she wants to terminate her lease with Tenant because she wants her nephew to rent the land beginning March 1, 2019. Landowner sends a letter to Tenant and Tenant receives it October 30, 2018. Is the lease terminated so the nephew may rent it on March 1, 2019?

No, the lease is not terminated because an oral year-to-year lease requires a tenant to receive notice by September 1, 2018. Here, Tenant received noticed from Landowner on October 30, 2018. This means that Tenant may lease the farm land until August 31, 2019.

Example 2:

Same facts as above except now, Landowner sends a notice to quit to Tenant, which Tenant receives on August 30, 2018. Is this lease terminated so the nephew may rent it on March 1, 2019?

Yes, the lease will terminate as of February 28, 2019. Keep in mind the lease between Landowner and Tenant continues through February 28, 2019 but the Tenant has received a proper six months notice of termination, which is required under Nebraska law.

Third, some gotchas:

The above represent the default rules in Nebraska for termination of unwritten year-to-year leases. The landowner and tenant can come to a mutual, voluntary agreement to modify the default rules. Thus, if both the landowner and tenant agree, an unwritten year-to-year lease may end in June with 30 days notice. The key is that there must be a mutual, voluntary agreement to do so.

If a landowner is terminating an unwritten year-to-year lease, it is advisable to do so with a letter and not in-person. Additionally, it is best to send the notice to quit with time to spare from the September 1 deadline, as the tenant must receive the notice by September 1; it is not relevant when the landlord sends the notice.

Moreover, the above rules do not apply to written leases. To terminate a written lease, the landowner and tenant must merely review what the lease states about termination and follow the lease provisions.

If you need clarification or just want to ask about dates and deadlines, you are welcome to contact us. We’re happy to help farmers and ranchers (both landowner and tenant!).

Friday, August 17th is the last day to enroll in Conservation Reserve Program (CRP). This program is for eligible producers who agree to take sensitive land out of production. In return, the producer will receive an annual rental payment and cost-share assistance for installing practices from the Farm Service Agency (FSA). Land must be eligible and suitable for certain conservation practices which include, but not limited to, riparian buffer, wetland restoration on flood plain, filter strips, and grass waterways. Contracts for this program can last 10-15 years and payments will reflect the updated soil rental rates. For more information, please visit the CRP Continuous Enrollment Period. Or contact your local Farm Service Agency Office.

If you have any questions regarding various programs available from the Farm Service Agency, please send them to us.

National Agricultural Statistics Service (NASS) is ending is collection of responses to the 2017 Census of Agriculture on July 31, 2018. NASS send the census around every five years to gather data on the state of agriculture across the US. The census is used to get a snapshot of ag in the US to help inform future decision making. All responses are confidential. Access the survey here or call 866-294-8560.

If you have general questions regarding the Census of Agriculture, please contact us.

Two separate free workshops will be offered to farmers and ranchers in western South Dakota. The workshops are from 9am-12pm. These workshops are not limited to Beginning Farmers and Ranchers and are open to the public. To register (and for questions) call the Rural Response Hotline at 1-800-464-0258.

Wednesday, July 11th 2018

Sturgis, South Dakota

Sturgis Community Center

1401 Lazelle Street

Thursday, July 12th 2018

Belle Fourche, South Dakota

First Interstate Bank

41 5th Street

Each workshop will address farm and ranch estate and succession planning, including transfer tools (wills, titling & trusts), incapacity planning, taxes, co-ownership of assets, direct and indirect forms of ownership, legal tools for balancing the interests of on-farm and off-farm heirs, asset protection, and examples of planning. The workshops will also cover USDA/Farm Service Agency loan programs for beginning and established farmers and ranchers, including direct and guaranteed loans, beginning farmer loans, microloans, and storage facility loans.

These workshops are made available through The Nebraska Network for Beginning Ranchers and Farmers, which includes services in South Dakota, Wyoming and Colorado, and the Farm Law Project of Legal Aid of Nebraska.

The Farmer Veteran Coalition is hosting their 2018 Stakeholder Conference in Kansas City, MO. The conference will be from Wednesday, November 14 to Saturday, November 17 at the Intercontinental Kansas City. Find out more information here.

Scholarships are also available to Farmer veterans interested in attending the conference. The scholarships are available for travel and lodging. Applications are due September 1, 2018. Applications are available here.

This conference will be a wonderful opportunity to learn about resources available and also to network with other veterans interested in farming. Contact the Farmer Veteran Coalition for more information.

WASHINGTON, March 12, 2018 — The U.S. Department of Agriculture (USDA) today announced the decision to withdraw the Organic Livestock and Poultry Practices (OLPP) final rule published on January 19, 2017. The rule would have increased federal regulation of livestock and poultry for certified organic producers and handlers. The withdrawal becomes effective May 13, 2018.

Significant policy and legal issues were identified after the rule published in January 2017. After careful review and two rounds of public comment, USDA has determined that the rule exceeds the Department’s statutory authority, and that the changes to the existing organic regulations could have a negative effect on voluntary participation in the National Organic Program, including real costs for producers and consumers.

“The existing robust organic livestock and poultry regulations are effective,” said USDA Marketing and Regulatory Program Undersecretary Greg Ibach. “The organic industry’s continued growth domestically and globally shows that consumers trust the current approach that balances consumer expectations and the needs of organic producers and handlers.”

According to USDA reports for 2017, the number of certified organic operations increased domestically by seven percent and globally by 11 percent. Industry estimates show that organic sales in the United States reached almost $47 billion in 2016, reflecting an increase of almost $3.7 billion since 2015.

The Department carefully considered public comments and the relative costs and benefits for both producers and consumers of imposing the proposed additional regulations.

A webinar is scheduled for Friday, March 16th at 10:00 a.m. – 11:00 a.m. as part of the Nebraska SARE Webinar Series. The webinar title is, “A Visit to Slow Foods Nation, Denver 2017”. This past summer Jerry and Renee Cornett of Prairie Plate Restaurant near Waverly, NE received a SARE Travel Scholarship to participate in this event. This event focuses on a number of food issues and there are several opportunities to participate in different discussions and programs. More than 10,000 chefs, policymakers, farmers and food lovers from all over the world will be talking about food justice, sustainability and management. There was discussion over agricultural issues and all kinds of food were there as well. Jerry and Renee will talk about their experience at this event during the webinar. The link to the webinar is: https://unl.zoom.us/j/193166489. This webinar will be recorded if you are unable to participate at this time. If you have questions, contact Gary Lesoing at (402) 274-4755.

This past weekend, Legal Aid of Nebraska’s Michelle Soll from the Farm and Ranch Project, spoke at the Women in Ag conference in Kearney, NE. She spoke to the attendees over Saturday brunch, highlighting the struggles she is witnessing with her work. While there, she was interviewed by the Kearney Hub about the importance of her work with the Rural Response Hotline and the Farm and Ranch Program. Find the article titled, Michelle Soll there to provide assistance, advice for Nebraska Rural Response Hotline, here.

If you need assistance or would like more information, please call the Rural Response Hotline at 1-800-464-0258.

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This website and blog is for educational and informational purposes only. Please contact legal counsel in your state (or contact us to determine if you qualify for Legal Aid of Nebraska's services) to discuss your specific questions.

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Legal Aid of Nebraska's Farm and Ranch Project is the oldest continuously operating farm legal services program in the United States. Due to a grant from the USDA's National Institute of Food and Agriculture Beginning Farmer and Rancher Development Program, Legal Aid of Nebraska has the opportunity to further its range of services to Nebraska and South Dakota farmers and ranchers.